FHA loan applicants have many things to budget and plan for. Mortgage insurance is one of the costs associated with a home loan, and FHA loan applicants are required to pay an annual mortgage insurance premium.
The reason for mortgage insurance is to protect the lender against a loss associated with a default/foreclosure on the home. An FHA borrower making a down payment of less than 20% is required to carry mortgage insurance.
But borrowers should know that mortgage insurance isn’t required for the entire term of the loan. The insurance is automatically terminated based on the nature of the loan, the length of the loan term and the Loan to Value ratio or LTV.
According to the FHA official site, for all FHA mortgages closed after January 1, 2001, the FHA annual mortgage insurance premium is canceled automatically according to the following circumstances;
Loans greater than 15 years–the insurance is canceled when the LTV reaches 78%, as long as the FHA borrower has paid the MIP for at least five years. FHA rules state “FHA will determine when a borrower has reached the 78% LTV ratio based on the lesser of the sales price or appraised value at loan origination. ”
Loans 15 years or less with LTV of 90.01% or greater–FHA MIP is canceled when the LTV reaches 78% no matter how long the borrower has paid annual mortgage insurance premiums.
15 years or less with LTV of 90.00% or less–these loans are not charged MIP.
There is an exception to the automatic cancellation rule–according to the FHA, “…for loans closed and insured under the Hope for Homeowners Program, the annual MIP is collected monthly for the life of the loan.” For more information on FHA mortgage insurance premiums and their termination, contact your FHA lender or see this article at FHAloan.com.